Unga AGM FY 2011-12

Location: KICC Amphitheatre

Date: 5 Dec 2012

Time: 10.30 am

My opinions in italics 

The matatu strike had delayed a lot of folks but the check-in handled by CRS was relatively slow. It took almost 30 mins to check in but it was organized since the security was good. There was a lunch voucher given at registration - more on this later.

It seemed the majority of the initial questions were not related to the Financial Statements or Annual Report. There was a sense of frustration among the directors since the questions were about SWAG (aka freebies like T-Shirts, flour, etc).

The relevant questions came at towards the end of the Q&A on the Financial Statements.

Q: What property is Unga planning to sell?

A: 4 acres on Ngong Rd but it is earmarked for "Recreational Use" only thus the sale is probably limited to Sports Clubs or such users. It is unlikely, like in the old days, that a buyer can change the use. The MD even thought that Nairobi needs the green space.

Q: What is the valuation of the properties?

A: Unga revalues the properties every 5 years & the next revaluation is coming up in 2013. The ROA is quite low.

Q: Does Unga use GMO grains/products?

A: No, since the law does not allow GMO but the MD was emphatic that when the next drought hits Kenya, which has been the case every 3-4 years, GMO grains will be imported.

Q: Why not buy local grain?

A: The local grain is very expensive especially maize since NCPB pays KES 3,000 per 90kg bag. This means the farmers expect a higher price. Unga pays sooner than NCPB and will not buy low-quality maize. The biggest competition are regional, not national, millers who don't care about quality.

Q: Why are the related party transactions/purchases with Seaboard Corporation (which owns 35% of Unga Holdings Ltd) amounting to KES 4.16bn (2011: 2.9bn) so high?

A: Seaboard is a large soft commodities trader & provides financing when banks may be more expensive or unwilling to do so. The purchases from Tanzania could drop if there is a ban on exports.

It was mentioned that the next 2-3 years will be tough with high interest rates, volatile exchange rates, high/volatile commodity prices, increasing costs and inflation. Competition has grown substantially from the regional (mid-sized) millers. Are they evading taxes?

The firm (& its subsidiaries) are planning to spend lots of capex to increase/improve capacity. I am not sure how these will be funded with the low ROA.

What was left unsaid but one could 'feel' was the question/risk of the election. Unga's buying centres are in areas (Nakuru, Eldoret) that were severely affected by PEV 2008. Imports have to come by road or rail from Mombasa which were disrupted.

The Board declared a KES 0.75 dividend & this was passed with nary a whisper. It was mentioned that dividends not swag is what shareholders should want.

Alan McKittrick & Andrew Stewart Ndegwa were re-elected as directors. There were 2 vacancies created by the resignation, of the erstwhile Chairman, Richard Kemoli & Jeremiah Kiereini. The new Chairperson is Isabella Ochola-Wilson who handled the meeting well despite the "swag" complaints & questions.

Some shareholders had complaints/questions unrelated to the Financial Statements but were gently chided by the Chairperson for not sticking to matters on the agenda. The matter came to a head when the agenda item regarding 'electronic dissemination' of information & dividends was being discussed. The Company Secretary explained why it was necessary to update the Articles & Memorandum of Association to 'match' the new laws.  of  A major gripe was that he (among other shareholders) did not have e-mail. The counter was that the abridged information would be published in the newspapers but some shareholders claimed they did not buy newspapers. 

A section of shareholders were fed up of the proceedings & visibly agitated at the back & forth about the 'electronic dissemination'. Others started walking out since lunch was 'pending'. I think if they had offered the lunch packs earlier, the hall would have emptied out sooner. An appeal to wait till the AGM was over was ignored. No idea what was in the lunch pack but these must be the largest cost of holding the AGM.

An uneventful AGM with no surprises but the outlook seems bleak over the next 2-3 years unless there is a paradigm shift in the taxation regime, interest rates and business environment.

Mumias Sugar Company - Rights Issue in 2013?

It seems to me that Mumias will need to raise funds for expansion as the COMESA deadline approaches.

http://www.businessdailyafrica.com/Opinion---Analysis/State-must-privatise-sugar-mills-urgently/-/539548/1627038/-/10oqds8/-/index.html

The link above from Business Daily Africa is quite eye-opening. The highlights are mine.

"The latest development in the sugar industry is the talk about an impending acquisition of one of the new sugar factories in the Southern Nyanza region by one of the players in the industry.

Initially, I was inclined to dismiss the talk as having no substance. But I changed my mind after I found out that Office of the Commissioner for Monopolies had actually dispatched its officers in the field to study the implications of the impending acquisition and to investigate whether it was likely to lead to over concentration of economic power in the sugar industry by one player."

1. "New" sugar factory threw me off but it has been rumored for a long time that Mumias wants to take over the sugarcane fields of the inefficient (or dying) government owned competitors.
2. The acquisition, even if not approved yet, seems to be gathering steam if the Commish is sending folks out there.
3. Mumias is the largest sugar firm in Kenya & would only grow larger (volumes) if it acquires a local rival.

I figure that once the approvals are in place, the Rights Issue will be planned but likely to happen AFTER the elections are concluded & a new president is in place.

Why has South Korea overtaken Kenya? Because its rulers can limit their greed

Original Source:

http://www.telegraph.co.uk/news/uknews/1493489/Why-has-South-Korea-overtaken-Kenya-Because-its-rulers-can-limit-their-greed.html

Why has Asia boomed in recent decades, while Africa has sunk into penury?

The pithiest answer is a joke I first heard in Nigeria. An African and an Asian make friends at Oxford before becoming politicians.

Years later, the African visits the Asian and is impressed by his mansion, with a Mercedes-Benz in the drive.

"How can you afford this?" he asks. The Asian points to a majestic highway outside. "See that road?" he says with a wink. "Ten per cent."

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Later the Asian visits the African's home - a palace with a dozen Mercedes-Benzes.

Anticipating the question, the African says: "See that road?" The Asian sees only bush. "100 per cent."

This is closer to the truth than many on Tony Blair's Commission for Africa would care to admit. East Asia has grown richer in spite of corruption because its rulers felt bound to not steal too much.

They may have skimmed off a bit but they did build the road. Africa's rulers did not.

Consider the cases of Kenya and South Korea. In 1960 South Koreans were, on average, poorer than Kenyans. They are now 25 times richer. What can account for this extraordinary divergence?

It is unlikely to be the legacy of colonialism. The British were disrespectful of Kenyan culture and crushed the Mau-Mau uprising with great ferocity. The Japanese were far more brutal, banning Korean culture and enslaving perhaps 100,000 Korean girls to work in military brothels.

Then, after the Second World War, Korea endured a civil war in which a million people died. Kenya had no comparable trauma.

Some of the differences must be linked to education. South Korean children thrash nearly everyone at maths and science. Kenyan kids do not.

That is not because Koreans are more clever. A more plausible reason is that Korean children do lots of homework. In the early 1990s I lodged with a Korean family in Seoul. The two teenage boys studied hard but never hard enough for their mother. And the father told the elder one that he had to study engineering, whether he wanted to or not, because that was the way to a good job.

Contrast that with Kenya's Masai tribe. Rural Masai send their cleverest sons out to herd cattle, a high-status occupation, and their dimmer children to school.

Given the demands of the modern world, you might think this unwise. But in a way it makes sense. In a meritocratic society such as South Korea, education brings rewards. An engineering degree means a good job.

But in Kenya, those with the power to hire tend to employ members of their own tribe, no matter how lazy or incompetent they may be. So the pay-off from diligent study is less certain; the country has legions of jobless graduates. Korea has tribal problems too. Those from the south-western region of Cholla suffered serious discrimination until quite recently. But there was nothing on the scale taken for granted in Kenya.

The country's first president, Jomo Kenyatta, was from the Kikuyu tribe, who remember him as the father of the nation. Others remember him as the man who gave all the plum jobs to Kikuyus.

Under his successor, Daniel arap Moi, the tables were turned. His Kalenjin tribe were first in line to put their fingers in the public till.

The man who ousted Moi in the elections of 2002, Mwai Kibaki, promised to end the corruption culture. At first he delivered, sacking half the judiciary and warning police to stop robbing motorists.

But then Mr Kibaki grew sick and the Kikuyu cabal around him set about looting the country unchecked. The symbolic end to the anti-corruption drive was when the widely respected anti-corruption minister, John Githongo, fled to London in February, fearing for his life.

Even before then, traders in Nairobi's biggest slum market were telling me that the main reason business was bad was that the police kept confiscating their stock and demanding bribes to give it back.

The difference between the two countries is mostly attributable to politics. Kenya's rulers are parasitic. They enter politics to get rich and care little about the little people.

South Korean governments, though far from perfect, have consistently made economic growth their top priority.

If you doubt that politics matters, consider the case of North Korea. Only half a century ago it was culturally identical to the South - and slightly richer.

After two generations of homicidal Marxism, it is probably as poor as Kenya, although no one really knows because publishing honest statistics there can put you in a prison camp.

• Robert Guest works for The Economist. His book, The Shackled Continent: Africa's Past Present and Future, is out in paperback this month.

NIC Rights Issue - 2012 - Shenanigans?

What an interesting but odd (& worrying) tidbit about the NIC Rights Issue that was forwarded to me:

What is or has the CMA done after they were informed?

	NSE website	Newspapers
Total Number of New Shares Accepted Under Entitlement	85,988,640	85,509,866	478,774
Total Value of New Shares Accepted Under Entitled [KShs]	1,805,761,440	1,795,707,186	10,054,254
Take Up Percentage	87%	87%	-
Number of Untaken (Lapsed) Rights	12,735,751	13,214,525	(478,774)
Total Number of New Shares applied for Under-application for Additional Shares	248,318,371	248,324,971	(6,600)
Total Number of New Shares applied for Under Entitlementand Application for Additional Shares	333,834,837	333,834,837	-

The table/results published in the Newspapers (Daily Nation of 11th Oct 2012 Pg 22, The Standard of 11th Oct 2012 Pg 13).

So who got the 478,774 shares at the last minute?

Abu Dhabi - Next destination for Kenya Airways?

Interesting tidbit from Reuters.
http://uk.reuters.com/article/2012/10/08/uk-airfrance-etihad-airbelin-idUKLNE89700R20121008

KQ's 2nd largest shareholder [& technical partner] is Air France-KLM therefore the recent agreement between AF-KLM "Air France-KLM, Etihad, Air Berlin plan partnership" probably means KQ may reduce flights to Dubai in favor of Abu Dhabi to take [code-share] advantage of Etihad's worldwide connections to Australia, China, North America & the Far East.

Etihad flies to Nairobi & a code-share for ET passengers to (Southern, Eastern, Central, Western) Africa may make sense for both parties. I expect Etihad will not give up major destinations like Jo'burg & Lagos but let KQ handle smaller destinations like Entebbe, Kigali, Kinshasa, Luanda, etc

Kenya MPs National Anthem

From: "Rawser"
http://www.nation.co.ke/News/politics/MPs+award+themselves+Sh2bn+bonus+in+secret+deal+/-/1064/1526316/-/kluja4z/-/index.html

Kenyan MPs remix of the national anthem:
........................................................................
Politicians of all persuasions
Strip this our land and nation
Fortunes motivate us and keep us
May we steal with impunity
Dodge taxes in unity
Plenty be sourced within our dockets

Let all politicians arise
With scams both wily and foolproof
Eating be our earnest endeavor
And our cake-stand of Kenya
Heritage of plunder
May we fight forever to perpetuate

Let parties with one accord
In common greed united
Bankrupt our nation together
May the agony of Kenya
The fruit of our behavior
Remain hidden from our 2013 voters

Lessons from India's (Dabbawallas) lunch deliverymen

Source: An article by Carol Musyoka from Business Daily Africa
http://www.businessdailyafrica.com/Opinion+++Analysis/Lessons+from+Indian+lunch+deliverymen/-/539548/1515248/-/item/0/-/r0g02g/-/index.html

Ownership inherently drives behaviour.

As simple as that. Compare this to the performance of firms or individuals who have little interest since they have little or no ownership. More later.

"...the dabbawalas do not consider themselves employees, nor do they consider the Mumbai Tiffin Box Suppliers Association as their employer.

The dabbawalas are shareholders and entrepreneurs, albeit all earning the same amount of money every month within their respective teams."

Government Interference - Case #1 - Kenya Airways

"Raila orders KQ to suspend layoffs" reads the headline. And click on the link provided to read more.

I am no apologist for KQ's Board of Directors & Management - which in my view decimated KQ's shareholders' value - and my views can be found here (FY 2011-12 results), here (Corporate Governance) & here (Irregular Commission Payments).

So back to our task at hand. Remember the elections are around the corner & the blabbermouths are out in force!

"Prime Minister Raila Odinga has directed Kenya Airways to suspend the planned retrenchment of its employees expected to see between 650 to 1500 employees lose their jobs."

The government owns about 30% of KQ. The other 70% is NOT owned by GoK. Unlike GoK, the other 70% expects KQ to make a profit. A decent profit. If the PM, Raila Odinga, wants KQ to 'suspend' the retrenchment, then by all means provide KQ with one or all of the following to help it recoup its potential losses:

1. Reduce the tax on fuel used by the planes when they fill up in Kenya.
2. Reduce the taxes on plane tickets purchased in Kenya.
3. Reduce the charges levied by 100% GoK owned airports including JKIA.
4. Reduce the taxes on spare parts & consumables like tyres imported by KQ.
5. Reduce the bureaucracy that impedes businesses & increases costs.

"It is not clear where the prime minister was drawing his powers, given that the airline said it was implementing a decision reached by its board of directors, in which the government is represented."

These 'roadside declarations' made famous in daniel moi's days should not be gussied up & made to look anything but. They are not what Kenya needs. Kenya needs structures & governance that lasts after a politician is long dead & buried/cremated/interred.

"Naikuni said the exercise started on August 1, 2012 owing to the large increase in headcount in 2011/12, significant annual staff salary increments, and costly decisions driven by the Collective Bargaining Agreements (CBA) negotiations with the staff unions driving labour costs to unsustainable levels."

Many employees, including senior Management, in Kenya do not want a stake in firm. They want a salary. Simple. Yet they want benefits of 'capital' without investing a dime. KQ's staff won good concessions from KQ but failed to see it could kill the airline. And KQ's Management is to blame too. They agreed to those concessions.

Bottomline: There is no free lunch. Someone always has to pay the piper. Politicians need to let businesses do their thing. If there is an illegality, then let the police & courts do their work.

Mortgages - Are banks at risk?

Original source from Business Daily - Click the link below
http://www.businessdailyafrica.com/New+mortgage+laws+tie+down+spouses++/-/1248928/1469428/-/87e4mxz/-/index.html

A marriage certificate is now a critical document for anyone applying for a mortgage loan thanks to new land laws that require the involvement of spouses in property acquisition.

What happens to spouses (traditional marriages, etc) who do not Marriage Certificates?

And for the prospective home buyers still in the singles’ club, a sworn declaration of their status would be required as new legislation - intended to protect the interests of the borrowers’ spouse, takes effect.

What if the borrower lies to the Bank/Lender that s/he is single?

The demand that the spouse is involved in the acquisition of property financed by a lender, as envisaged in the Lands Act, is aimed at ensuring that the immediate family is aware of any loans sought to either acquire matrimonial property or where the property has been given as security for a loan.

The immediate family - what's the definition? Do they just have to informed or do they have to OK the transaction?

Doesn't this lock out a spouse who is moving out of the matrimonial home due to a divorce, separation or other event?

A much bigger concern for borrowers who had kept their spouses in the dark over such loans, is that the new laws will apply to existing and new mortgages, meaning less obscurity about financial dealings in the family setting.

What happens to an EXISTING loan/mortgage? What if as a strategic move, the spouse of the Borrower objects? Do banks have to write off these loans?

So far, mortgage lenders have said that thousands of home loan borrowers will be required to re-draft their loan agreements to comply with the regulations which make a spouse’s consent critical in accessing credit. “All mortgage charges will be re-drafted to ensure that spouses assent to the borrowing,” said Frank Ireri, the managing director at mortgage lender Housing Finance.

The Loan Agreements may be re-drafted but what if the spouse (or spouses) object? In essence, it means the Lender is out the money.

Mr Ireri explained that the laws were aimed at protecting the borrowers, where lenders have had a free hand in dealing with the mortgaged property with little regard to the interests of the borrowers and the immediate dependents.

This is a huge step forward for consumers.

It is the reality of losses presented by the new regulation that will prompt the lender to draw up new mortgage charges on all home loans...

What happens if the Borrowers refuse to play ball?

Banks are also required to involve tenants and all interested parties, including spouses and guarantors, before disposing of any property to recover outstanding loan amounts where property has been used as security.

Wow! Involving Tenants means the banks will be forced to hold off on the sale for ages! What if a tenant refuses to assent to the sale or a reduction in the rental rate? Can they blackmail the bank?

ARM vs KQ - Performance & CEO's ownership

Pradeep Paunrana, the CEO of Athi River Cement, is a substantial shareholder of ARM.
March 2009 ARM was trading at 60/-. July 2012 the price of the shares 198/-.
Pradeep has raised funds to expand the firm's operations without diluting the shareholders' value.

Titus Naikuni, the CEO of Kenya Airways, has ZERO shares in KQ. His compensation is probably in the region of KES 30-40mn annually [based on the info on the Annual Report under Executive Directors' compensation].
March 2009 KQ was trading at 18/-. July 2012 the price is 14/-.
The under-performing Board raised funds by diluting existing shareholders through a huge (16:5) Rights Issue that required exemptions from the CMA to be considered successful.














Comparing the two on the same graph. ARM in red. KQ in blue.